5 High-Flying Stocks After Recent Broker Rating Upgrades

The sole aim of investors, while designing their portfolio, is to generate attractive returns. No one wants his/her hard-earned money to go down the drain. However, with a plethora of stocks flooding the stock market, the task is by no means an easy one. In fact, the process is like spotting a needle in a haystack, especially if the investor is unaided.

Choice of improper stocks can adversely impact his/her returns, thereby ruining the very objective of investing hard-earned money in the highly unpredictable stock market. To avoid such confusion, investors, more often than not, rely on guidance provided by brokers as they have a clear insight into the complexities surrounding the investment world.

Brokers revise their earnings estimates after carefully examining the pros and cons of an event for the concerned stock. Naturally, their stock related actions (upgrade or downgrade) serve as an invaluable guide as far as fixing the target price of stock (s) is concerned.

Moreover, the abovementioned action of brokers is by no means arbitrary and is instead guided by sound logic. Thus, the direction of estimate revisions serves as an important pointer regarding the price of a stock.

For example, an earnings beat by a company generally leads to upward estimate revisions with prices moving north. Similarly, a stock may fall out of analysts’ favor due to adverse events like pipeline failure (for a biotech company). Trimming of earnings estimates by brokers often leads to stock price depreciation. Naturally, investors would look to dump such stocks on the basis of broker advice.

To take care of the bottom-line performance, we have designed a screen based on improving analyst recommendation and upward estimate revisions over the last four weeks.

Top Line to Be Considered As Well

Designing a strategy based solely on the bottom line is unlikely to culminate in a winning strategy. Actually, according to many market watchers a revenue beat is more creditable for a company than a mere earnings outperformance, especially in an environment of revenue weakness due to macroeconomic headwinds. To take care of the top line, we have included in our screen the price/sales ratio, which serves as a strong complementary valuation metric.

Screening Criteria

# (Up- Down Rating)/ Total (4 weeks) =Top #75: This gives the list of top 75 companies that have witnessed net upgrades over the last 4 weeks.

% change in Q (1) est. (4 weeks) = Top #10: This gives the top 10 stocks that have witnessed earnings estimate revisions over the past 4 weeks for the upcoming quarter.

To ensure that the strategy is a winning one, covering all bases, we have added the following screening parameters:

Price-to-Sales = Bot%10: Lower the ratio the better, companies meeting this criteria are in the bottom 10% of our universe of over 7,700 stocks with respect to this ratio.

Price greater than 5: A stock trading below $5 will not likely create significant interest for most investors.

Average Daily Volume greater than 100,000 shares over the last 20 trading days: Volume has to be significant to ensure that these are easily traded.

Market value ($ mil) = Top #3000: This gives us stocks that are the top 3000 if one judges by market capitalization.

Com/ADR/Canadian= Com: This eliminates the ADR and Canadian stocks.

Here are five of the 10 stocks that made it through the screen:

American Airlines Group (NASDAQ:AAL) operates more than 6,700 daily flights to over 330 destinations in more than 50 nations across the globe from its hubs. American Airlines is headquartered in Fort Worth, TX and carries a Zacks Rank #3 (Hold). The Zacks Consensus Estimate for 2019 and 2020 earnings has increased 1.4% and 0.2% respectively, in the past 60 days.

AutoNation (NYSE:AN) is the largest automotive retailer in the United States. The company, carrying a Zacks Rank #3, also offers vehicle maintenance and repair services, vehicle parts, extended service contracts and vehicle protection products. The company has a long-term (three to five years) expected earnings growth rate of 2.3%.

Dillard's (NYSE:DDS) is a large departmental store chain featuring fashion apparel and home furnishings. The company also sells its merchandize through the Internet at Zacks Investment Research

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Written By: Zacks Investment Research